Europe, Asia catching case of U.S. falloff

Pessimistic outlooks for rest of year amid talk of recession

August 14, 2008|By David Jolly, NEW YORK TIMES NEWS SERVICE and New York Times reporters Martin Foster and Thomas Fuller contributed to this report.

More signs of the economic slowdown appeared Wednesday on two continents, Asia and Europe.

In Europe, the Bank of England offered a pessimistic outlook for the rest of the year, saying that it expected the economy to stagnate and inflation to hit 5 percent because of energy and food prices.

And in Asia, Japan appears to be flirting with a recession, government data showed Wednesday.

"The numbers were awful," Hideo Kumano, chief economist at Dai-ichi Life Research Institute in Tokyo, said after the Japanese government reported that the gross domestic product shrank at an annual 2.4 percent rate in the three months that ended June 30. "Things are going to be very tough in the second half of the year."

Even as commodity prices are beginning to ease, the credit and housing crises in the United States, coupled with the highest inflation in a generation, are weighing on consumers.

In Europe, where new figures on the overall economy are to be released Thursday, analysts are expecting more bad news.

"It may still just be summer, but there is a feeling of chill in the economic air," Mervyn King, the governor of the Bank of England, said Wednesday after the central bank issued its pessimistic outlook. He said the British economy was going through "a difficult and painful adjustment."

The euro zone, which six months ago appeared to be sailing clear of America's problems, now appears to have caught the contagion. A poll of economists by Reuters predicted that the new reports would show that the region's economy fell 0.2 percent in the second quarter compared with the previous quarter. First-quarter growth was 0.7 percent.

As for Japan, Kumano said the most serious threat came from a sharp decline in personal income, which fell 4 percent. He said he expected growth in the fiscal year, which runs through March, to be 0.6 percent at best, down from a previous forecast of 1.2 percent.

The rest of Asia, including China, will not be immune to the slowdown in the major economies, he said.

The International Monetary Fund, which considers growth of 3 percent or less in the world's gross domestic product to be a recession, estimated July 17 that the global economy would grow 4.1 percent in 2008 and 3.9 percent in 2009, slowing from 4.5 percent growth in the first quarter of 2008. But many private sector economists say those forecasts look overly optimistic.

"It's a race against time" whether the global economy ends up in a recession, Gilles Moec, an economist at Bank of America in London, said. "Japan and Europe had been seen as protected from the U.S. slowdown. Strangely enough, it seems that Europe and Japan are paying the price now."

He noted that unlike in the U.S., where the Federal Reserve has sharply cut interest rates since the start of the credit crisis, to 2 percent from 5.25 percent, the response among other central banks might not have been aggressive enough to support growth.

The Bank of Japan, which has not raised its main rate target above 0.5 percent since 1995, has "exhausted its room to maneuver," he said, while the Bank of England and the European Central Bank, with key rates at 5 percent and 4.25 percent, respectively, have chosen to focus on inflation rather than faltering growth.

There are some positive signs. Moec said the recent decline in the price of oil and other commodities had provided grounds for hope that things would begin picking up by the end of the year. Oil prices have fallen from their peak above $147 a barrel last month to $116 on Wednesday.

If prices for oil and other commodities keep falling, companies may remain confident enough about the outlook to avoid serious cuts in payrolls, and the worst will be avoided in the major economies, Moec said.

The IMF made its forecast in July when oil prices were at their peak, he said, noting that Bank of America's own forecasts called for 2008 growth of 3.2 percent and 2009 growth of 3 percent.

"Everything depends on oil," Moec said.

The United States remains a question mark. The American economy grew at a 1.9 percent annualized rate in the second quarter, a disappointing performance considering the billions of dollars of government stimulus checks that went out to consumers during the period.

In Tokyo, officials were optimistic, despite Wednesday's data. The economics minister, Kaoru Yosano, said the weakness resulted mainly from external factors like high oil prices.

"Even though the economy contracted in April-June, it would be more accurate to think that it won't last long," Reuters quoted him as saying.